How are payroll deductions calculated in Canada?
<strong>Canadian employers are legally required to withhold federal income tax, provincial income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums from every employee's paycheque.</strong> These are called statutory or mandatory deductions, and the Canada Revenue Agency (CRA) sets the rates and formulas each year in the T4127 Payroll Deductions Formulas guide.
The process works by annualizing the employee's per-period gross pay, calculating annual tax and contributions, then dividing back to the pay period. This is why your per-period deductions can change slightly with different pay frequencies even if your annual salary stays the same.
In addition to statutory deductions, employers may withhold voluntary deductions such as union dues, RRSP contributions, and registered pension plan (RPP) contributions. Union dues and RPP contributions reduce your taxable income, which in turn reduces your income tax withholding.
Quebec has its own set of rules. Quebec employees pay into the Quebec Pension Plan (QPP) instead of CPP, and pay Quebec Parental Insurance Plan (QPIP) premiums instead of receiving EI maternity/parental benefits. Quebec workers also receive a 16.5% federal tax abatement to offset the fact that Quebec collects its own income tax separately.
CPP, EI, and employer contribution rates for 2026
<strong>Employers pay their own share of CPP and EI on top of the employee's deductions.</strong> For CPP, the employer matches the employee's contribution dollar-for-dollar (1:1). For EI, the employer pays 1.4 times the employee's premium. These employer-side costs are not deducted from your paycheque but they increase the total cost of employing you.
For 2026, CPP contributions are 5.95% on pensionable earnings between the $3,500 basic exemption and the Year's Maximum Pensionable Earnings (YMPE) of $74,600. The CPP2 enhancement adds 4% on earnings between $74,600 and $85,000. Both the employee and employer contribute equally to CPP and CPP2.
EI premiums are 1.63% on insurable earnings up to $68,900. The maximum employee premium is $1,123. The employer's share is 1.4 times that amount, or $1,572 per employee per year. Quebec workers pay a reduced EI rate of 1.30% because QPIP covers parental benefits separately.
For an employee earning $75,000 per year in Ontario, the employer's total statutory costs above gross salary are approximately $5,050 in CPP (matching the employee's $4,230 base CPP plus $16 in CPP2) and $1,572 in EI, totalling roughly $6,622 in payroll taxes.
| Deduction | Employee rate | Employer rate | Max earnings | Max employee contribution |
|---|---|---|---|---|
| CPP (base) | 5.95% | 5.95% (1:1 match) | $74,600 | $4,230 |
| CPP2 | 4.00% | 4.00% (1:1 match) | $85,000 | $416 |
| EI (outside QC) | 1.63% | 2.28% (1.4x) | $68,900 | $1,123 |
| EI (Quebec) | 1.30% | 1.82% (1.4x) | $68,900 | $896 |
| QPP (Quebec) | 5.30% | 5.30% (1:1 match) | $74,600 | $3,765 |
| QPIP employee | 0.455% | 0.636% | $103,000 | $469 |
| QPIP employer | n/a | 0.636% | $103,000 | $655 |
What are TD1 claim codes and how do they affect your deductions?
<strong>The TD1 Personal Tax Credits Return determines how much income tax your employer withholds from each paycheque.</strong> When you start a new job or your personal situation changes, you fill out a federal TD1 and a provincial TD1. The total claim amount on these forms sets your "claim code," which your employer uses to look up the correct withholding amount in the CRA payroll tables.
Claim Code 1 is the most common: it represents the basic personal amount only. For 2026, the federal basic personal amount is $16,452 and each province has its own basic personal amount. If you claim only the basic personal amount, you are using Claim Code 1.
Higher claim codes mean you are claiming additional credits (such as age amount, pension income amount, disability amount, or tuition transfer), which reduce your tax withholding. Claim Code 0 means no claim amount, which results in maximum tax being withheld. This is used when an employee has multiple employers.
The calculator above defaults to the basic personal amount for both federal and provincial TD1 claims. If your TD1 form shows a higher total claim amount (because you are entitled to additional credits), increase the claim amount sliders to match.
How are payroll deductions different in Quebec?
<strong>Quebec administers its own pension plan (QPP), parental insurance plan (QPIP), and provincial income tax, making payroll deductions in Quebec different from every other province.</strong> Employers with Quebec employees must register with Revenu Quebec in addition to the CRA.
The Quebec Pension Plan (QPP) replaces CPP for Quebec workers. For 2026, the QPP employee contribution rate is 5.30% on pensionable earnings between $3,500 and $74,600, slightly lower than the 5.95% CPP rate outside Quebec. QPP2 (the enhancement) adds 4% on earnings between $74,600 and $85,000, the same as CPP2.
The Quebec Parental Insurance Plan (QPIP) provides maternity, paternity, parental, and adoption benefits. The employee rate for 2026 is 0.455% on insurable earnings up to $103,000, and the employer rate is 0.636%. Because QPIP covers parental benefits, Quebec workers pay a reduced EI rate of 1.30% instead of the standard 1.63%.
Quebec residents also receive a 16.5% federal tax abatement. This reduces the federal income tax that the CRA withholds, but is offset by the fact that Quebec collects its own provincial income tax through Revenu Quebec (TP-1 return) rather than through the federal T1 return.
How do union dues, RRSP, and pension deductions affect your pay?
<strong>Union dues, RRSP contributions, and registered pension plan (RPP) contributions are deducted from your gross pay and reduce your taxable income.</strong> This means you pay less income tax when these deductions are present, partially offsetting their cost.
Union dues are mandatory for unionized employees and are fully deductible from income. They typically range from $20 to $100 per pay period depending on the collective agreement. While you pay union dues out of your gross pay, the tax savings mean the actual cost to you is less than the full amount.
RRSP contributions deducted at source reduce your taxable income immediately, which means less tax is withheld each pay period. This is more beneficial than making RRSP contributions outside payroll because you get the tax benefit right away instead of waiting for your tax return. The 2026 RRSP deduction limit is 18% of the previous year's earned income, up to $32,490.
Registered pension plan (RPP) contributions, such as a defined benefit or defined contribution workplace pension, also reduce your taxable income at source. Many employers match RPP contributions, making them a valuable part of total compensation.
Worked example: payroll deductions on $2,885 biweekly in Ontario
An Ontario employee earning $2,884.62 biweekly (equivalent to $75,000 annual salary, paid 26 times per year) would see the following deductions on each paycheque.
Federal income tax: $356.46 per period. This is calculated by annualizing the gross pay ($75,000), applying the progressive federal brackets, subtracting the basic personal amount credit ($16,452 at 14%) and the CPP/EI credits, then dividing by 26 pay periods.
Ontario provincial tax: $155.92 per period. Ontario taxes the first $53,891 at 5.05% and income from $53,891 to $75,000 at 9.15%, minus the Ontario basic personal amount credit.
CPP contributions: $163.31 per period (base CPP of $162.69 plus $0.62 in CPP2). These are calculated on the annualized pensionable earnings and divided by 26.
EI premiums: $43.19 per period (1.63% of $2,884.62, capped at the annual maximum of $1,123).
Total statutory deductions: $718.88 per period. Net pay: $2,165.74 per period. The employer pays an additional $163.31 in CPP (1:1 match) and $60.47 in EI (1.4x the employee's premium), bringing the total employer cost to $3,108.40 per period.
Frequently asked questions
What is the difference between payroll deductions and income tax?
Payroll deductions include everything withheld from your paycheque: federal and provincial income tax, CPP/QPP contributions, EI premiums, and any voluntary deductions like union dues or RRSP contributions. Income tax is just one component of your total payroll deductions. CPP and EI are social insurance premiums, not income taxes.
How much does the employer pay on top of my salary?
Your employer matches your CPP/QPP contributions dollar-for-dollar and pays 1.4 times your EI premium. In Quebec, the employer also pays a higher QPIP rate (0.636%) than the employee (0.455%). For a $75,000 salary, employer-side payroll costs add roughly $6,600 above your gross salary.
Why is my EI deduction lower in Quebec?
Quebec residents pay a reduced EI rate of 1.30% instead of the standard 1.63% because the Quebec Parental Insurance Plan (QPIP) provides maternity and parental benefits that EI covers in other provinces. Quebec workers pay QPIP premiums separately at 0.455%.
What is TD1 Claim Code 1?
Claim Code 1 means you are claiming only the basic personal amount on your TD1 form. For 2026, the federal basic personal amount is $16,452. This is the most common claim code for employees with one employer. If you have additional credits (age, disability, tuition transfer), you may have a higher claim code.
Do union dues reduce my income tax?
Yes. Union dues are deducted from your gross pay before income tax is calculated, which reduces your taxable income. If your marginal tax rate is 30%, a $50 union dues deduction saves you $15 in income tax, so the net cost to you is $35.
What is the difference between CPP and CPP2?
CPP (base) applies a 5.95% contribution rate on earnings between $3,500 and $74,600 (the YMPE). CPP2 is the second additional contribution introduced in 2024 as part of the CPP enhancement. It applies a 4% rate on earnings between $74,600 and $85,000. Both employee and employer contribute equally to CPP2.
How accurate is this payroll deductions calculator?
This calculator uses the official 2026 CRA rates for federal tax, provincial tax, CPP/QPP, CPP2/QPP2, EI, and QPIP. It provides a close estimate for regular employment income. Actual paycheque amounts may differ slightly based on year-to-date earnings (which affect when CPP and EI max out), additional tax credits, and employer-specific deductions.
When do CPP and EI deductions stop during the year?
CPP base contributions stop once your year-to-date pensionable earnings reach $74,600. CPP2 stops at $85,000. EI premiums stop once insurable earnings reach $68,900. After these caps, your take-home pay per period increases for the rest of the year because those deductions are no longer withheld.
Does this calculator work for self-employed individuals?
This calculator is designed for employees. Self-employed individuals pay both the employee and employer portions of CPP/QPP (11.90% combined for CPP, 10.60% for QPP) and may opt into EI voluntarily. Self-employed workers also remit their own income tax installments quarterly rather than having deductions at source.
What is the Quebec federal tax abatement?
Quebec residents receive a 16.5% reduction in federal income tax. This abatement exists because Quebec administers its own income tax system through Revenu Quebec, while other provinces have their provincial tax collected by the CRA. The abatement partially offsets the additional Quebec provincial tax.